*776 Compensation received by petitioner from the State of Alabamaheld taxable, since petitioner was not an offcer or employee of that state within the meaning of the Public Salary Act of 1939.
*1058 Deficiencies have been determined in income tax for the calendar years 1935, 1937, 1938, and 1939 in the respective amounts of $47.24, *1059 $1,018.90, $5,813.10, and $69.12. This proceeding was initiated to test the correctness of the determination in so far as income received from the State of Alabama has been included in the gross income of petitioner. The issue is whether or not petitioner was an officer and employee of the State of Alabama during the taxable years. The deficiency for the year 1939 has been conceded.
FINDINGS OF FACT.
Petitioner resides in Alabama and made his returns for the periods in question with the collector for the district of Alabama.
At all times here material petitioner was a member of a law partnership practicing in Birmingham, Alabama.
On November 13, 1931, a contract of employment was entered*777 into between the then Attorney General of the State of Alabama, Thomas E. Knight, Jr., as party of the first part, and petitioner, as party of the second part. The contract was approved by the then Governor, B. M. Miller, on November 14, 1931, and carried on its face the notation "O.K., S. R. Butler, State Tax Commissioner." The contract provided in part as follows:
That the party of the first part does hereby employ the party of the second part as a special Assistant Attorney General for a period of term beginning with the date of this instrument and ending at the time when the present term of office of Attorney General shall end, and such employment shall be limited to the specific purpose of representing the State of Alabama in prosecuting misdemeanants, in collecting, compromising and adjusting the delinquent taxes and licenses, charter fees and other taxes due the State of Alabama hereinafter set out, and the party of the second part does hereby accept said employment for the consideration hereinafter named and agrees to discharge his duties under this agreement promptly with all his skill and diligence, to wit:
* * *
It is understood that this agreement shall apply to*778 the preceding years as the present and succeeding years covered by this agreement and that the party of the first part reserves the right and authority to terminate this contract at any time the party of the first part, through its Attorney General, may see fit, and the Governor reserves the right to withdraw his approval of this contract at any time, and in case such approval is withdrawn thereupon this contract shall be null and void; provided, however, that where approval is withdrawn or contract terminated the party of the second part shall be given thirty days notice in advance of the date when contract is to become null and void. This contract is subject to whatever laws may be hereafter enacted relating to any matter herein contained.
On November 14, 1931, petitioner was commissioned a "Special Assistant Attorney General", the commission being signed by the Governor and Secretary of State of Alabama. Petitioner thereafter executed an oath of office. The contract provided in general for petitioner to collect, on behalf of the State of Alabama, delinquent taxes and fixed petitioner's compensation.
*1060 Immediately thereafter petitioner conferred with his partners*779 and it was agreed that petitioner would devote his entire time to the state work and would not be called upon for the general work of the law firm. Petitioner was to remain a partner in the firm and, as his contribution, was to pay into the firm $500 a month out of the proceeds he would receive from the state in payment for the work he was about to perform. Thereafter, petitioner devoted his entire time to state duties.
From 1931 to 1935 Knight was Attorney General of Alabama, and petitioner usually received his information and instructions from Knight relative to the cases he was to handle during this period.
From 1935 to 1939 Albert Carmichael was Attorney General of Alabama, and petitioner continued to perform substantially the same services under Carmichael as he had heretofore performed under Knight. No new commission was issued and no new written contract was entered into between petitioner and Carmichael, although the contract with Knight expired by its terms "when the present term of office of Attorney General shall end." Carmichael exercised a greater degree of supervision over petitioner's activities than had his predecessor and advised petitioner, both verbally*780 and in writing, that he must be subject to the Attorney General's control and direction in the performance of his services in collecting delinquest taxes. He particularly gave advice and instructions with reference to the filing of suits and dismissal or compromise of suits, and required that no compromise be entered into without his specific approval.
The method of handling tax collections was substantially as follows: The tax commission prepared and submitted to the Attorney General a form showing the amount of tax, penalties, and interest, which the Attorney General forwarded to petitioner, with or without special instructions. If a claim were in a distant county the petitioner would forward it to associate counsel in such county, who would proceed to take the necessary steps for the collection of the amount due. Such associate counsel did not have a commission, but if suit was filed it was filed in the Attorney General's name and in petitioner's name as Special Assistant Attorney General. During the administration of Carmichael from 1935 to 1939, it was the practice of that official to designate the name of the persons who would act as associate counsel and it was necessary*781 that petitioner deal with the counsel that the Attorney General had designated. Where collections were made by an associate counsel, the entire collection would be forwarded to petitioner and he would pay such associate counsel for his services. Petitioner handled personally many claims and suits over the state and most of those in Birmingham and Jefferson Counties.
*1061 Under the contract of employment petitioner received a fee equal to 20 percent of the tax collected and out of this fee he was required to pay the operating costs. If he collected nothing in a given case he received nothing. Where associate counsel were used the associate received two-thirds of the fee of 20 percent and the petitioner received one-third. In a large number of cases checks covering the tax were made payable to petitioner and he would take out his fee of 20 percent and remit the balance to the state authorities. Where checks in payment of taxes were received through associate counsel the same practice was followed, petitioner taking out the fee of 20 percent and remitting to the associate counsel two-thirds thereof, and the balance of the amount recovered was sent to the proper authorities*782 of the State of Alabama. Occasionally the tax was paid directly to the State of Alabama, in which case petitioner would put in a claim and would receive his fee of 20 percent.
Petitioner was appointed under authority of section 861 of the Code of Alabama, 1923. 1 A similar provision of law had appeared as early as 1915. As far back as 1919 other attorneys had performed, under similar arrangements, services of the character performed by petitioner.
*783 Some 2,000 claims were forwarded to petitioner and successfully collected by him, many of which were collected without suit, but many required suit. Suits were instituted by petitioner against various counties and municipalities within the State of Alabama for collection of the state gasoline tax, two or three of which went to the Supreme Court of Alabama. There were thousands of claims on which petitioner was unable to make collections, all of which required effort and expense, and the expense of which was paid out of the 20 percent received by petitioner from claims actually collected. Roughly, there were pending in Jefferson County during the years *1062 1931 to 1939 about 6,000 ad valorem tax appeals, and during the period 1935 to 1939 about 3,000 were still pending, all of which were handled personally by petitioner.
The amounts involved in this proceeding were from the 20 percent compensation on delinquent taxes, with the exception of $2,500 which was paid in 1937 as compensation for the ad valorem work.
During the taxable years 1935 to 1939, petitioner's income from the partnership was as follows:
| 1935 | $4,826.68 |
| 1936 | 4,478.92 |
| 1937 | 3,816.93 |
| 1938 | 6,135.31 |
| 1939 | 1,688.28 |
*784 Petitioner's gross income and expenses for the years 1935 to 1939, inclusive, were as follows:
| Year | Gross income | Expenses |
| 1935 | $12,140.10 | $9,001.89 |
| 1936 | 9,877.08 | 11,788.20 |
| 1937 | 30,939.69 | 17,401.22 |
| 1938 | 49,559.87 | 15,792.45 |
| 1939 | 20,506.91 | 10,870.27 |
For the year 1937, of the total expenses of $17,401.22 $13,756.40 represented attorneys' fees paid to associate attorneys, and for the year 1938 the amount of expenses attributable to associate attorneys' fees for the same purpose was $8,083.25.
The income for the years 1937 and 1938 largely grew out of winning and settling certain gasoline and excise tax cases which represented litigation or efforts to collect that continued over a period of two or three years, involving two or three suits which went to the Supreme Court of Alabama, all of which were handled directly by petitioner under the supervision and direction of the Attorney General.
OPINION.
ARUNDELL: It now seems clear under Helvering v. Gerhardt,304 U.S. 405">304 U.S. 405, and *785 Graves v. New York, ex rel. O'Keefe,306 U.S. 466">306 U.S. 466, that there is no constitutional objection to the Federal Government taxing the salaries of officers or employees of the several states. These decisions opened a new chapter and closed an old one. The Congress felt, however, that it would be unfair to apply this new interpretation of a constitutional principle to salaries received in past years and the Public Salary Tax Act of 1939 was enacted. (Public No. 32, 76th Cong., 53 Stat. 574.) The effect of that act is to apply the old test to salaries received from a state or subdivision thereof prior to January 1, 1939, as laid down in Metcalf & Eddy v. Mitchell,269 U.S. 514">269 U.S. 514.
*1063 Petitioner claims that he was an officer or employee of the State of Alabama, engaged in performing an essential governmental function. We think there can be no dissent from the fact that the collection of taxes is an essential governmental function. As establishing that he is an officer or employee, petitioner points to the commission he held as "Special Assistant Attorney General", the taking of an oath of office, the long duration of his appointment, and*786 the dontrol exercised over him by Attorney General Knight and, more particularly, the control exercised by Attorney General Carmichael during the taxable years here involved. The respondent, in support of his argument that petitioner was a contractor rather than officer or employee, points to the fact that his duties, compensation, and tenure are fixed by contract and not by statute. He points to the fact that petitioner was to conduct his work from his own office, pay all expenses of operation, and work such hours as he saw fit, and was to receive for his services the equivalent of 20 percent of the delinquent taxes he collected. As pointing to the fact that petitioner was not an officer or employee, respondent observes that a large number of the cases were farmed out by petitioner to other lawyers who actually did the work on behalf of the state, and in these cases petitioner took one-third of the fee and gave active counsel two-thirds of the commission provided by the contract. During all this time petitioner remained a member of his law firm. In lieu of performing the usual active service he paid into the firm $6,000 from his state earnings and at the end of the year received*787 his regular share of the partnership profits.
While the decisions of the Board and the courts are not altogether consistent in cases of this type, we agree with respondent that petitioner was not an officer or employee of the State of Alabama during the several years within the meaning of the Public Salary Tax Act. The compensation paid petitioner, which was fixed by contract and not by statute, was out of all proportion to the salaries paid to the regular officers of the state. (Alabama Code, secs. 754, 856.) La Rochelle v. Commissioner, 115 Fed.(2d) 878. Nor is it customary for state officers to be paid a commission based on what they can turn in to the state treasury, at the same time paying their entire operating expenses, continuing to occupy their own office, working such hours as they see fit, and receiving nothing unless they are successful in getting results, which, in this case, means collecting delinquent taxes. John Armistead,42 B.T.A. 1430">42 B.T.A. 1430. Officers and employees of the state are paid for services rendered by them and are customarily not permitted to receive a commission on work performed by others. The practice of taking out*788 their fees and remitting the balance to the state is certainly not customary with government or state officials. The fact that Attorney General Carmichael determined who would *1064 be associate counsel has no significance. It was patronage of a sort, as was the contract petitioner held.
But for the fact that petitioner received a commission as Special Assistant Attorney General and took an oath of office, there would appear to be no merit whatsoever in his contention. But everyone who has a state commission is not an officer of the state within the meaning of the Public Salary Act. Commissioner v. Murphy, 70 Fed.(2d) 790; John T. Rowland,40 B.T.A. 11">40 B.T.A. 11; affd., 115 Fed.(2d) 504. Some authority had to be given petitioner in order that he might represent the state in the courts of Alabama. The very suits to collect the delinquent taxes were instituted in the name of the state or in the name of the attorney general of the state and some authority had to be given him to appear or else he would not have been recognized. When a lawyer in private practice represents a client he must first have authorization from his client, *789 but this does not make counsel an employee of his client and this is true no matter how frequently counsel appears for his client or the number of years over which the services extend.
Nor are we impressed with the so-called control exercised by the Attorney General. The fact that petitioner was in frequent consultation with the Attorney General is, in and of itself, of little importance. Quite naturally the Attorney General insisted that he be kept advised of what was going on and insisted that the taxpayers be not unnecessarily harrassed by needless lawsuits. The fact that the Attorney General required that he be consulted before taxes were settled or compromised for less than the amount due does not establish the control over petitioner that would serve to make him a state employee. Private counsel constantly consult with their clients when litigation is to be settled or compromised. The Federal Government has established an elaborate system of safeguards surrounding the compromise of tax cases. There is nothing in the record which establishes that petitioner did not carry on the work of collecting delinquent taxes in the manner dictated by his own judgment. There were*790 general instructions to be followed, which is always required when public rather than private matters are being handled. It seems to us such instructions as were given were what to do rather than how to do the job.
It has been suggested that the $2,500 flat fee paid in 1937 for handling certain cases should, in any event, have a different treatment. There is not sufficient evidence in the record to differentiate.
In our opinion petitioner was not an officer or employee of the State of Alabama within the meaning of the Public Salary Act of 1939, and it follows that the compensation received by him from the State of Alabama was properly taxed.
Decision will be entered under Rule 50.
Footnotes
1. 861. Attorneys and counsellors employed by attorney-general and governor. - Whenever in his opinion the public interest requires it, by reason of the volume of work in his office, and the importance of the business and the interest of the state in the matter, whether civil or criminal, the attorney-general, with the approval of the governor, or the governor himself, may retain and employ in the name of the State of Alabama, such attorneys and counsellors at law as he thinks necessary to the proper conduct of the public business, and shall stipulate in writing with such attorneys and counsellors the amount of their compensation to be approved by the governor before employing them, and shall supervise their conduct and proceedings.
862. Special attorney or counsellor; oath and liabilities of. - Every attorney or counsellor who is specially retained under the authority of the attorney-general or the governor, to assist in the trial of any case, or in any other matter in which the state is interested, shall receive a commission from the secretary of state as a special assistant to the attorney-general; and shall take the oath required by law to be taken by the attorney-general and shall be subject to all the liabilities imposed upon them by law.
863. Compensation of assistants and attorneys, how paid. - The special assistants to the attorney-general herein authorized shall be paid upon the warrant of the auditor drawn upon the certificate of the attorney-general, approved by the governor, that their services were actually rendered, that they were necessary for the efficient conduct of the public business and could not be performed by the officers regularly provided by law. ↩